Tuesday, October 14, 2014

Pleading standards for false advertising

Cocona created a process to use coconut particles in fabric,
which is used for outdoor gear, to enhance odor control, moisture absorption,
and UV protection. Singtex formerly made that fabric for Cocona, but then went into
business selling a competing product made from coffee rather than coconut. Cocona
sued for breach of contract, trade secret theft, unfair competition, and
interference with contract.I won’t
discuss the contract/trade secret claims, which survive the motion to dismiss,
or the interference with contract claim, which goes because Cocona doesn’t
identify specific contracts lost.

Cocona alleged that Singtex misrepresented the traits of S.Café
and misrepresentated comparisons to Cocona’s product, claiming that S.Café provided
odor absorption, ultraviolet protection, and moisture control and that S.Café
could perform in a manner comparable to Cocona’s products despite its knowledge
that S.Café didn’t have the same qualities.

Singtex argued that these allegations had to satisfy Rule
9(b), and that the alleged claims were merely puffery. Courts are split on
applying Rule 9(b) to Lanham Act false advertising claims; some say yes because
of the similarity to common law fraud, while others say no because, unlike the
common law, the Lanham Act requires no scienter.But the leading Ninth Circuit case, Vess v.
Ciba–Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003), holds that Rule 9(b) can
apply to either all of a claim or part of it, under three circumstances: (1) if
fraud is an element of the claim; (2) if fraud isn’t an element, but the
plaintiff nonetheless “allege[s] a unified course of fraudulent conduct and
rel[ies] entirely on that course of conduct as the basis of a claim,” Rule 9(b)
applies to “the pleading of that claim as a whole”; (3) if the plaintiff alleges some fraudulent
and some nonfraudulent conduct that isn’t a unified course of conduct, only the
allegations of fraud are subject to Rule 9(b).Thus, the court concluded, Rule 9(b) applies to Lanham Act false
advertising claims only insofar as the factual averments allege intentional or
knowing misrepresentations.

Thus, the court found, Rule 9(b) applied to one of Cocona’s
theories, its false comparison claim, because Cocona alleged that Singtex knew
that its products didn’t have performance equivalent to Cocona’s products when
it claimed otherwise.But Cocona’s second
theory involved only misleading statements about Singtex’s own products, and it
didn’t allege knowledge in the narrative portion of the complaint. The factual
allegations underlying this theory of recovery didn’t sound in fraud, so Rule
9(b) didn’t apply (even though there were general allegations about willfulness
at the end of the complaint going to Cocona’s claim for relief).Comment: The Ninth Circuit approach has never
struck me as sensible, since scienter is never a required element even if it’s
alleged and so the plaintiff can win without proving anything about the
defendant’s state of mind, but I’m not a civil procedure expert.

Cocona failed to plead the allegedly false comparisons with
particularity.While it alleged that “Singtex
has expressly compared S.Café products to Cocona’s proprietary yarn fabrics”
and that “[u]pon information and belief, Singtex informed Cocona’s customers
that the S.Café products provide the same performance qualities as Cocona’s
proprietary products,” sporadic conversations aren’t commercial advertising or
promotion. Even if the conversations reached enough of the market to constitute
advertising, Cocona didn’t allege the “who, what, when, where and how of the
alleged” falsehoods.

Cocona’s claims based on Singtex’s allegedly misleading
representations about its own products’ qualities did suffice under Rule 8(a).
It identified specific statements on Singtex’s website, which was unquestionably
advertising or promotion, and alleged that they were false or misleading. It alleged lost sales, too.That was enough for plausibility.

Singtex argued that the challenged claims were mere
puffery.But the challenged ads were
statements of fact: according to the complaint, Singtex claimed that S.Café “utilizes
coffee grounds’ natural ability to adsorb odors for a comfortable wearing
experience. It also provides UV protection, and is very fast drying.” It
allegedly relies on the spaces created within a green coffee bean as it expands
during the roasting process for these “high performance” features. Likewise,
the website claimed: “[w]ith our coffee ground permanently imbedded in the
fiber, the particles work hard with controlling and absorbing odors. The
trapped odors are then released with the [sic] your next wash-and-dry cycle of
your S.Café clothing.”And for UV
protection, the website said, “[w]ith S.Café fabric coffee particles in the
fabric, these particles actually refract and diffuse the sun’s rays. This
provides for a natural UV protection throughout all the S.Café fabric
collection.”

These were specific factual statements. Though they didn’t
explicitly provide any frame of reference, Cocona alleged that the statements
could be measured by comparing Singtex’s performance against “a traditional
polyester fiber that has not been treated with chemicals.” That sufficed to state a claim.

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